2018-06-20

Improving financing for SMEs was a reform goal during Xi's first term. High financing costs squeeze small- and medium-sized firms. Private finance fills the gap, but this is often black and gray market financing. When combined with speculative bubbles in real estate, steel trading or the asset du jour, the result was a collapse in the local economy. One example from 2014: Handan Residents Afraid to Buy Homes; Market Frozen With Developers on the Brink

On effect in terms of policy, lowering interest rates played a role in real accurate. People's Bank of China data show that as of the end of June 2015, the weighted average interest rate of the new loans was 5.97 percent, over the previous year fell 64 basis points, down 101 basis points over the previous year; the central bank on the real economy through loans, bonds, stocks and other Comprehensive assessment of all types of financial instruments and financing costs showed overall financing cost of 6.32 percent, over the previous year fell 68 basis points, down 85 basis points over the previous year.

However, Zhang Chenghui's research shows that although the central bank cut interest rates and RRR several times, 70% of the loan interest rates went up, only about 10% of the loan interest rate declined, and the remaining 20% ​​of the loan use the benchmark interest rate.

"I figure a bit based on the Wind database, since the end of September 2013 to the end of May 2015, average loans from financial institutions dropped from 6.65% to 6.56%, P2P net loans fell 12.75%, Wenzhou's private lending interest rates fell 1.69 percentage points. Figures show non-formal financial institutions outside the system of financial institutions, the central bank lowering quasi reflect much faster than formal financial institutions, formal financial institutions interest rates fell an average of only 0.1 percent." Zhang Chenghui said.

While banks generally believe that easing monetary policy can reduce financing costs, it's not a permanent solution. Minsheng Bank Shenzhen Branch President Wu Xinjun said its SME lending rate fell from 7.8% at the beginning of the current year to 6.8% presently, if there is further easing of monetary policy, SME lending rates could fall further, but based on cost factors, the room to fall is limited.

Credit remains tight for SMEs. One borrower says their interest costs will climb from 6.6% to 8%, enough to cut 1% off their 10% profit margin. Owners describe it as plucking the feathers from the goose as banks raise interest rates and fees in a search for profit.

One SME says the bank told him if he wants to borrow ￥8 million, he needs to first deposit ￥8 million into a savings account. He says in order to borrow ￥1, SMEs have to pay ￥0.16 in costs.

Another SME will borrow ￥150 million at 12%, or ￥18 million in annual interest costs. However, with fees to trust intermediaries, costs rise to ￥33 million annually, or 22%.

Banks aren't making loans with no collateral, so borrowers using credit guarantee firms see their costs rise 2% to 5%. So probably not good that Credit Guarantee Firms Go Down Like Dominoes.

Clearly there's a very good reason to move SME financing into official channels and out of the gray and black markets. There appears to be some success in this area simply for the fact that we're focused on bond market and trust defaults in 2018, not credit guarantee firms and private lending networks as was the case in 2014 and 2015. Back then investors were buying copper for collateral to borrow from banks at low interest and lend to developers at high interest who then ran out of cash before finishing construction. Some of them rehypothecated the copper and that blew up at Qingdao Port.

SMEs aren't benefiting yet though. Once again, the government's reform and credit tightening efforts are choking off their credit channels. Hence the expansion of MLF in June and increasing focus on SMEs.

China will use targeted cuts in banks’ reserve requirement ratios (RRR) and other policy tools to boost credit support for small firms and keep economic growth steady, state radio on Wednesday quoted a cabinet meeting as saying.

...“We will use targeted RRR cuts and other monetary policy tools to enhance the ability to provide credit for small and micro firms,” state radio quoted the cabinet as saying.

The cabinet pledged measures, such as raising rediscount quotas and cutting relending rates, to channel more loans to small firms and reduce their funding costs, it added.

From September 1 until the end of 2020, interest income from credit up to 5 million yuan ($772,546.78) for eligible small firms and households will be exempt from value-added tax, it said.

Premier Li Keqiang of the State Council presided over the State Council Executive Meeting on June 20 to deploy further mitigation of financing difficulties for small and micro enterprises and continue to promote the cost reduction of the real economy; to speed up the examination and approval of new drugs listed overseas, to implement price cuts for anti-cancer drugs, and to strengthen shortage drugs Supply protection; adoption of the Regulations for the Prevention and Handling of Medical Disputes (Draft).

The meeting identified measures to further ease the financing difficulties of small and micro enterprises financing: First, increase support for small and micro enterprises and "three rural" refinancing, rediscounting the amount of credit, and lowering the interest rate of small and medium-sized loans. The assessment mechanism was perfected, and the year-on-year growth rate of loans for small and micro enterprises with a total credit amount of RMB 10 million or less per single household was higher than that of all loans. The number of households with outstanding loans was higher than the level of the same period of last year.

Since shadow and informal lending is being squeezed, it's not clear how much of this is lending moving on-balance sheet and how much is growth.

Second, from September 1st to the end of 2020 this year, the interest income from loans for eligible small and micro enterprises and individual industrial and commercial households will be exempted from the VAT single line credit limit, which will increase from 1 million yuan to 5 million yuan. The total amount of guarantees supported by the National Financing Guarantee Fund for financing of small and micro enterprises is not less than 80%, of which the amount of guarantees for small and micro enterprise loans and individual industrial and commercial households that support single-family credits of 5 million yuan or less, and small and micro-enterprise owners’ operating loans Not less than 50%.

Third, financial institutions are prohibited from charging commitment fees and fund management fees for loans to small and micro enterprises and reducing the additional financing expenses.

The fourth is to support banks in their efforts to explore the market of small and micro enterprises, and to use such monetary policy tools as directional RRR cut to enhance the ability to provide small and micro credit, and accelerate the landing of signed debt-to-equity conversion projects. Banks that have not established the Financial Inclusion Department are encouraged to establish additional communities and small micro branches.

The fifth is to include small and micro enterprise loans with a credit grant of 5 million yuan and below into the medium-term borrowing facility to facilitate qualified collateral.

Beyond government support, the market is stepping in with increased supply-chain financing.

China’s supply chain finance sector is now being tipped to be worth a whopping 15 trillion yuan (US$2.27 trillion) by 2020, and the mainland’s booming internet-based businesses are lining up to grab their own share of it.

Pan Zicong believes that his company can always “find good fortune,” and is not unrelated to the history of the company’s continued existence and the industry it is engaged in. Pan Zicong is the "second generation of enterprises," and his father has started from scratch and built this company. Now the company has been established for more than 20 years.

“We mainly make electrical appliances for home appliance companies. Some large home appliance companies in Shunde are our customers. The overall development is relatively stable. But even so, the problems of financing difficulties and financing are still there.” Pan Zicon told 21st Century Business Herald reporter, “Bank financing is the most favorable price in all channels, but for small and micro enterprises, it is almost impossible to get the benchmark lending rate. As far as I know, it is generally 20% to 30% above benchmark. This is only superficial cost. If we count some hidden costs, this is not the limit.For example, on-lending is the so-called bridging loan. There will normally be more than ten days between the old and new loans. If you need cash flow, the cost will be very high. The cost of coming to heaven may reach 10%, some even 20% [above benchmark]."

Earlier this year, Pan Zicong's company was fortunate to receive 3.4 million credits through Guangdong ABC's “micro-loans”. "Equivalent to an enterprise's credit card, the biggest advantage is that it can be used to pay back and improve the efficiency of use. In the past if our business had a loan of 3 million, but in the short term it will only use 2 million, and the other 1 million will also have interest. This is small In the case of micro-enterprise, it increases the cost; how much borrowing is needed now will not result in the idleness and waste of funds, said Pan Zicong.

However, compared with Pan's fortunes, more small and micro enterprises still faced no money, especially small and micro enterprises engaged in low-end processing. “I have been driving toy factories in Dongguan for 16 years. I have never borrowed a penny from a bank in Dongguan. First, banks will never lend us; second, even if borrowed, interest will rise significantly, and we will be able to The interest rates borrowed are comparable,” Zhang Yongqiang, general manager of Dongguan Leqiang Plastic Toys Factory, told a 21st Century Business Herald reporter.

Zhang Yongqiang stated that he has been brushing news every day and felt that the state’s support for small and micro enterprises has been increasing year by year. However, these policies seem to be far away from themselves. “The policy is good, but the total amount of small and micro enterprises is too large. So far, I have not benefited my head. Take the loan, for example, I have ran across the bank in the past few years when the business was good, but I did not borrow money from a bank. The terms of the loan are all very harsh and need to be mortgaged, but effective. Collateral is what SMEs lack."

Zhang Yongqiang told the 21st Century Business Herald reporter that his funds were borrowed from friends or upstream and downstream companies. “Our factory in Dongguan, Dongguan, also has more than ten years of time, and credit has always been relatively good, so basically it can be obtained. Many financial institutions feel that small and micro enterprises have high business risks and bad reputation, so they are reluctant to lend us money. Actually, I really want to appeal to you. Our small and micro enterprises are truly trustworthy companies. For example, I am borrowing money from my upstream and downstream friends or making payments. Once I lose my credit, I may not be able to borrow any more money. Therefore, we especially cherish our own reputation. The reasons for borrowing money, deadlines, and interest rates will all be indicated. Once it is due, it may even be paid in advance."

Effective collateral secures small and micro business loans

The problems encountered by Zhang Yongqiang, in fact, are very common among small and micro enterprises in Dongguan. Chen Dong, who works as a furniture manufacturer in Dongguan, talks about the survival status of small and micro enterprises. “Especially in the past two years, it can be said that several heads were blocked. First, the shift in demand from upstream customers caused the lack of orders; secondly, the cost increased year by year, making people breathless. I was impulsive to the factory several times last year. It's off, but it's pulled back by inertia every time you really want to make a decision."

Chen Dong said the cost includes land costs, labor costs and financing costs. “Compared to five years ago, the rent for the venue has risen from 8 yuan/square meter to 15 to 16 yuan/square meter; labor costs have more than doubled. If all kinds of insurance are counted, the actual expenditure of the factory In fact, it is around 5500 yuan, but in the past it was 2200 yuan; credit costs is rather stable, has remained high, about 10 percent." Chen Dong told the 21st Century Business Herald reporter.

Even at 10 points, Chen Dong has few opportunities to get loans. "The amount of money that can be borrowed by credit loans is very limited. One or two hundred thousand yuan is of little significance to our company. If we want to increase the loan, we need collateral."

Real estate still plays a role in financing:

Chen Dong told reporters in the 21st Century Business Herald that he was fortunate in Dongguan in the past few years that he had bought two houses in the early years. Now these two houses have played a key role in the loan. "A house is used to live and a house is used for mortgage. In recent years, in order to make a loan, the house has been repeatedly mortgaged many times. In the past when buying a house, the price was only 45,000/m2, and now it has risen to 20,000+. Appreciation has reached more than 3 million, relying on this house, the factory has spent time and time again financing difficulties."

Mortgage is not without risk. Chen Dong nearly lost the house last year. At the end of last year, Chen Dong received a single business of nearly 200,000 U.S. dollars. Because in the furniture industry in Dongguan, regular customers did not have any deposits to place orders. In order to purchase raw materials, Chen Dong mortgaged his house and loaned nearly 2 million yuan. Cash. However, there were unexpected circumstances. When Chen Dong delivered the goods, the customer suddenly declared bankruptcy, and 200,000 U.S. dollars were suddenly turned into nonsense. “At the time of the New Year approaching, the workers in the factory were still waiting to pay wages for the Chinese New Year. The funds on the account were bleak. If the operation was not careful, not only would the factory be closed, but the mortgaged property in the bank would also be subject to change.”

Fortunately, the Dongguan Municipal Government subsidized a 150,000 insured amount of insurance for the local SMEs. In the end, China Credit Guarantee paid Chen Dong 127,000. Together with the funds recovered from the bankruptcy company after liquidation, the single business was basically absent. loss. Chen Dong was also surprised to redeem the mortgage in the bank's real estate.

Guided by a series of policies, traditional financial institutions are increasing their support for small and micro enterprises. At the same time, however, there are still a large number of small and micro enterprises that are difficult to obtain loans, or the actual annual interest rate for obtaining loans is high, and the financing difficulties and financing problems of small and micro enterprises still exist.

The reason for this is that Dong Xilu, a senior researcher at the Chungyang Finance Research Institute of Renmin University of China, believes that it is mainly because some small and micro enterprises have difficulty in providing qualified pledges and collaterals, and they have a low degree of credit and investment risks. At the same time, the ability of small and micro enterprises to resist risks is generally weak, the life cycle is short, and the bad rate is high. According to the data, the average life expectancy of SMEs in China is about 3 years, and about one-third of the normal operations of small and micro enterprises after three years of establishment, and by the end of March 2018, the NPL ratio of small and micro enterprises was 2.75%. The company is 1.7 percentage points higher.

Therefore, financial institutions are more cautious when lending to small and micro enterprises. At present, the proportion of financing for small and micro enterprises in China from the formal financial institutions and private financing is roughly 40% and 60%. Compared with countries and regions where financial markets are more developed, the proportion of formal financial institutions still has much room for improvement. At the same time, private financing costs are also relatively high. Specifically, in recent years, the interest rates for small and micro enterprises in China's financial institutions averaged about 6%, the Internet lending rate was about 13%, Wenzhou's private lending registration rate was more than 15%, and microfinance companies and other financial institutions had interest rates of 15%. 20%.